“You can get poor a lot faster than you can get rich.” – Bob Miller
There is a lot more to investing than just setting aside money every month and hoping it turns into a large nest egg when you reach retirement age. Here are 5 common mistakes investors make:
Not Paying Attention To Your Investments
You don’t have to make investing a full time job but you have to put in some effort besides perusing back issues of Money Sense magazine. How well your investments perform can determine when and how you can retire, how big of an estate you can build and whether you will ever get to do the things on your personal wish list.
Whether you’re a do-it-yourselfer or have an investment manager, make sure your assets are managed in a systematic, disciplined way. Have a plan that covers both the short and long term – your life goals. Have a strategy to achieve your goals. Monitor how well the plan is working and adjust it if necessary depending on your results and changing conditions.
Trying To Time The Market
Many people are still searching for the secret of buying low and selling high but it’s almost impossible to pull this off. Even though the market’s overall, long-term trend has been upward, many stocks make most of their gains in short, dramatic spurts. Consequently, the price you pay for being out of the market at the wrong time is enormous.
Not only can you miss out on positive returns, but you’ll also pay transaction costs for making all the wrong moves. Overall, it’s easy to see why buy-and-hold investors have an advantage over those who try to outmaneuver the market.
Letting Emotions Drive Investment Decisions
Money is an emotional issue. It has a lot to do with our feelings of success, security and self-worth. When you use those emotions to make reactive, short-term decisions, you’ll get into trouble.
Irrational fear is usually the force behind the classic investment mistake of selling your stocks after the market takes a plunge. Those with cooler heads and a longer view know this actually may be the time to commit more money to equities.
Some investors are too conservative and let inflation eat away at their low returns. Others ride a tide of enthusiasm and go for the “get rich quick” schemes and super-aggressive investments hoping for a quick score and ignoring the higher risks.
To guard against emotional reactions you need a well-thought-out investment plan that you are willing to commit to.
Underestimating How Much Income You’ll Need
The biggest risk you’ll face is not the chance of losing your principal, it’s the risk of not accumulating enough so that you outlive your money. Calculate how much income you will need and factor in inflation (easier to do when you’re closer to retirement than when you’re just starting out).
Life spans are getting longer with each generation so you may be drawing on your savings for thirty years or more.
Don’t assume you’ll stay healthy. The cost of chronic ill health can mean huge financial setbacks especially if you will eventually need to move to a senior care facility or a retirement community.
Solely Measuring Performance Against Market Indexes
It’s gratifying to learn your portfolio has outpaced the TSX or the Scotia Bond Index and indeed that is how portfolio managers have measured their performance relative to their peers, but it’s much more important to know how well your investment program is doing in relation to your personal goals.
Your results may look great against market benchmarks, but still fall short of the asset growth you’ve targeted. If your portfolio loses money in one year, you’ll have to earn a greater amount in the next year to stay on track.
Look at your actual return after taking into consideration taxes, inflation and other expenses.
By avoiding investing mistakes you will build your wealth steadily and consistently over time without taking unnecessary risks. You’ll know where you’re going and how quickly you are getting there.
